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Securities Lending and Trading by Active and Passive Funds

Author

Listed:
  • Honkanen, Pekka

    (HEC Paris)

Abstract

U.S. mutual funds that participate in the securities lending market extract information from stock borrowing. Active mutual funds exploit this information for trading by rebalancing their portfolios away from borrowed stocks, whereas passive funds do not. This trading avoids capital losses on borrowed stocks, whose prices tend to decrease. Active funds also trade more aggressively on stocks with more negative future returns, suggesting that they are able to identify informed borrowing. Finally, passive funds charge higher lending fees than active funds, which is consistent with short sellers paying a premium to lenders with lower recall risk.

Suggested Citation

  • Honkanen, Pekka, 2020. "Securities Lending and Trading by Active and Passive Funds," HEC Research Papers Series 1390, HEC Paris.
    • Handle: RePEc:ebg:heccah:1390
    DOI: 10.2139/ssrn.3679808
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    More about this item

    Keywords

    Securities lending; short selling; mutual funds;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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